By Nageshwar Patnaik in Bhubaneswar, August 8, 2020: For centuries, pandemics have ravaged humanity changing the course of history more often than not. Hundreds of millions of people have died in the past due to these pandemics. The global community now confronts the Covid-19 pandemic, which has already infected more than 19 million people, killing over seven lakh so far and inflicted huge damage on economies around the world.

In tough times or any crisis situation, there are very little options before the policy makers and rulers than to consider surviving first, revive next and then thrive. The powers-that-be in India are working on by announcing a set of monetary and fiscal stimulus measures largely on this framework.

In the first phase, when the deadly virus hit the country, the Narendra Modi government emphasized on saving lives with lock downs and shut downs across the country. The lockdown was first announced by Modi on March 24 in a bid to combat the coronavirus endemic. It was further extended till May 3 hitting the income of farmers, workers and Micros, Small and Medium Enterprises (MSMEs) very badly.

In response to the biggest economic crisis triggered by the Covid-19 pandemic and the subsequent 54-day lockdown – one of the harshest in the world, the Modi Government announced the Atmanirbhar Bharat package totaling Rs 20 lakh crore with little burden on the exchequer as the fiscal relief is limited to just about 1.1% of GDP. It has, however, allowed states to increase their borrowing limit unconditionally by 0.5% of their Gross State Domestic Product (GSDP) or Rs 1.07 lakh crore.

At the same time, since the monetary policy is the de facto first line of economic defence against the ill-effects of the virus, the Reserve Bank of India (RBI) took a slew of measures to help businesses tide over the crisis following the lockdown such as moratoriums, refinancing support, regulatory forbearance, etc.

The RBI’s initial monetary policy response to COVID-19 initially was reduction of the repo rate to 4.4 per cent. It also slashed the reverse repo rate to 3.75 per cent to discourage banks from parking money with the Reserve Bank of India (RBI) and encourage them to give out loans instead.

On 27th March, RBI governor Shaktikant Das said, “Monetary policy needs to proactively arrest any deterioration in aggregate demand, and create enabling conditions for businesses to normalize production and supply chains.” The RBI’s intent was first to ensure survival of the businesses and check the downslide of the economy.

Again on April 27th, the RBI announced several other measures to maintain liquidity, which included Targeted Long Term Operations with non-banking financial companies to provide them access to cheaper capital for a longer period of time, provide additional refinancing options to All India Financial Institutions that play a crucial role in providing loans to the agricultural, rural and small business sectors, and increased ‘ways and means’ limits for both the Union and state governments to assist them in undertaking relief measures.

On Thursday, the RBI announced its monetary policy that signaled a shift towards the revival phase. The central bank expects a contraction in economic growth in this fiscal, but hopes moderation in inflation with likely bumper crops and a robust turnaround in the rural economy.

The six-member monetary policy committee (MPC) unanimously voted to keep the policy repo rate unchanged at 4 per cent and the reverse repo rate at 3.35 per cent, citing the importance of judicious use of policy tools.

Keeping in line with the Bankers’ pleas, the MPC did not extend the earlier moratorium beyond August and provided a window for lenders for resolution plan for borrowers without classifying them as non-performing assets (NPAs). For the first time, this resolution plan also includes personal loans.

The RBI Governor rightly observed, “A large number of firms that otherwise maintain a good track record under existing promoters face the challenge of their debt burden becoming disproportionate, relative to their cash flow generation abilities.”

MSMEs with a loan exposure of up to Rs 25 crore can avail of the benefit of restructuring. The facility, however, is only for those who were not in default for more than 30 days as of March 1, 2020. Restructuring has to be done by December 31 this year, and implementation has to be done by March 31, 2021, for personal loans and June 30, 2021, for other exposures.

The earlier moratorium meant the interest would add back as principal, but restructuring plan would typically entail some relaxation on interest rates and tenure which invariably would impact the banks’ normal lending activities because they would be busy doing resolutions of accounts till the end of the year.

The restructuring will be done in accordance with rules laid down under the June 7, 2019, framework on resolving stressed assets, but with riders like impact of Covid-19 disruption following which the accounts will be classified as “standard”. More loans would be disbursed if required only after the firms do through the process.

The central bank will constitute an expert committee under the chairmanship of veteran banker and former chief of New Development Bank K V Kamath to help RBI to decide on financial parameters.

One of the important moves by the RBI’s latest monetary policy is the inclusion of start-ups in priority-sector lending, and adjustment of risk weights so that banks lend to states and sectors they tend to avoid.

For the RBI and the Modi government, growth recovery remains a major concern. Uncertainty about the timeline of adverse impact of Covid-19, low consumer confidence and battered balance sheets of private sector threaten further slowdown in demand for credit. That is the real challenge before the RBI.